SEC May Allow Exemptions via the Net

The digital age continues to make inroads at the Securities and Exchange Commission, as the SEC said on Nov. 2 it is considering a plan to permit fund managers to file applications for exemptive relief, or variances from agency procedures, over the Internet. The industry has through Dec. 14 to comment on the proposal.

The requests for permission to customize some fund procedures and products could be filed electronically, rather than in multiple hard copies, if the plan is adopted. It would create an easily searchable electronic database of exemptive requests that would benefit investors and fund attorneys alike. By creating easier online access to these filings, mutual funds and their legal counsel would be able to obtain previous applications to use as blueprints for their own request.

Further, by making the files readily accessible to SEC staff, it would also speed up the exemptive approval process.

"In many ways, this is a done deal. It makes sense for the SEC to catch up with the available technology," said John McGuire, a partner at Morgan Lewis.

"This is another step in our commitment to making public filings available electronically for the benefit of investors," said SEC Chairman Christopher Cox, in announcing the initiative. "This proposal would significantly improve public access to exemptive applications through the Internet, and at the same time eliminate unnecessary administrative requirements for filers."

Fund companies have complained that the introduction of new products is slowed down because they can't get a timely decision on whether the new product or innovation complies with the 1940 Investment Act.

An October audit by the SEC's Office of the Inspector General of the 420 exemptive relief requests it received in 2005 found that the regulator was not able to meet its own guidelines for quick attention to requests for exemptive relief. The agency has said it will try to respond to applications within 45 days of receiving the filing.

The audit revealed that the agency was meeting this goal on only 16% of the requests it handled in 2005.

The new approach would put applications for such changes into an electronic repository. It would also streamline the current approach, which calls for investors who want to view exemptive applications to look through hard copies at the SEC headquarters or use the services of private companies that supply the information.

Barry Barbash, a partner at Willkie Farr & Gallagher, said the new procedures will create a better resource for the fund industry. The effect of the increased role for electronic filing will be that funds will have an easier time getting regulatory clearance.

"I don't know that it will have a monumental effect, but it is a useful step forward," Barbash said.

It will help fund companies' counsel determine whether permission has been granted for any number of actions, Barbash said.

He added that the process of searching for precedents using hard copies or the current generation of electronic searches is often "hit or miss."

Another change from the SEC's exemptive application procedure would have the agency no longer requiring some documents. Assuming the proposed changes are put into effect, the agency will no longer require some bureaucratic anomalies, such as the requirement that fund companies include a draft notice with their filing. A draft notice is a letter that states the SEC has approved the fund company's request.

"It turns out that the SEC creates its own draft notice when it takes action, so for the companies to have to include one is a useless exercise," McGuire said.

Mutual fund companies typically file exemption applications to seek permission to enter in transactions with affiliates, invest in certain types of financial instruments or to obtain relief from disclosure requirements. As the SEC explains in its proposal, the primary goal of the EDGAR system since its inception has been to facilitate the rapid dissemination of financial and business information in connection with filings, including those done by investment companies. The proposals would benefit the public and the industry by making the filings contained in EDGAR a more comprehensive resource.

They would benefit investors, financial analysts and others by increasing the efficiency of retrieving and disseminating those applications. The introduction of electronic filing of these documents would enable the public to access them more quickly and search them more easily.

The proposed system would eliminate or, at the least, reduce the role of middlemen, i.e., companies that sell the data to investors.

McGuire said the one question that will probably come up in the comment process is whether the electronic filings will be filed through EDGAR or whether they will be filed as PDFs or Word documents.

"If people have to file through EDGAR, it will be more expensive," he said.